Corporations

Question 1

De Jure Formation

Answer 1

A de sure corporation is a properly formed corporation. A corporation is formed when one or more people sign articles of incorporation. The articles of incorporation must include (1) the corporate name with corp. co, or litd. (2) the name and address of each incorporator, (3) the name and address of each initial director, (4) the name of the registered agent, and (5) a statement or purpose.

Question 2

De Facto Corporation

Answer 2

A de factor corporation arises when a corporation has not properly been formed (failed to properly file the articles of incorporation), and a court will act as though a corporation was formed despite failure to follow the strict requirements when (1) a relevant incorporation statute exists, (2) the parties made a good faith attempt to comply with the statute, and (3) there is some exercise of corporate privilege.

Here, the corporation was not properly formed because….
A relevant incorporation statue exists because…
the parties [did/did not] make a good faith attempt to comply with the statute because…
There [is/is not] some exercise of corporate privilege because…

Thus, there [is/is not] a de facto corporation.

Question 3

Corporation by Estoppel

Answer 3

An entity that holds itself out to be a corporation may be estopped from denying its existence.

Here, [entity] held itself out to be a corporation because…

Thus, a court will hold that there is a corporation by estoppel.

Question 4

LLC Formation

Answer 4

Generally, an LLC is formed when a certificate of organization is filed with the secretary of state and has at least one member.

Here, the certificate [was/was not] filed because…. There [is/is not] at least one member because…

Thus, an LLC [was/was not] properly formed.

Question 5

LLC Type

Answer 5

An LLC may be either member/managed or manager-managed. An LLC is presumptively member-managed when the certificate or organization fails to specify whether it is member or manager managed unless the members’ operating agreement specifies how the LLC is to be managed.

Question 6

Pre-Incorporation Contracts: Promoter

Answer 6

A promoter is a person acting on behalf of the corporation not yet formed. A promoter may enter into a contract on behalf of the corporation, pre-incorporation.

Here {person] [is/is not] a promoter because…. [Promoter] entered into a contract on behalf of the pre-incorporated organization because…

Thus, there is a promoter contract here.

Question 7

Pre-Incorporation Contracts: Corporation

Answer 7

A corporation is not liable for pre-incorporation contracts until the corporation adopts the contract. A corporation may expressly adopt the contract pursuant to board adoption. A corporation impliedly adopts the contract if the corporation accepts the benefits of the contract.

Here, Corporation [has/has not] adopted the contract because…

Thus, the corporation [is/is not] liable for the contract.

Question 8

Pre-Incorporation Contracts: Promoter

Answer 8

Unless the contract clearly provides otherwise, a promoter is liable on the contract unless and until there is a novation. A corporation must generally indemnify a promoter when a promoter is held liable on a pre-incorporation contract and has not violated any fiduciary duties to the corporation.

Here, there [has/has not] been a novation because. Promoter [has/has not] violated any fiduciary duties because…

Thus, promoter [is/is not] liable on the contract.

Question 9

Corporate management: Election

Answer 9

A corporations board of directors is elected by shareholders annually unless the terms of the board of directors are staggered.

Here, the election of director [was/was not proper] because….

Thus, election [was/was not] proper.

Question 10

Corporate management: selection of officers

Answer 10

Generally, a, officer is selected by the board of directors and may be removed by the board for any reason or for no reason unless the officer has been selected by the shareholders.

Here, officer [was/was not] properly selected because… Officer [was/was not] properly removed because…

Thus, the removal of officer [was/was not] proper.

Question 11

Corporate management: Removal

Answer 11

A director can be removed by a majority shareholder vote. A director can be removed only with or without cause unless the articles of incorporation provide that a director can only be removed for cause.

Here, the removal [wa/was not] by majority shareholder vote because…. Director was removed [with/without] cause because…

Thus, removal [was/was not] proper.

Question 12

Corporate management: meetings

Answer 12

The board of directors must hold meetings. A quorum must be present at any vote for an action of the board of directors to be valid.

Question 13

Corporate management: delegation

Answer 13

The board of directors may delegate duties to a committee or a corporate officer.

Question 14

Corporate management: officers

Answer 14

Corporate officers are appointed by the board of directors. A corporate officer can be removed by the board of the directors, with or without cause.

Question 15

Rights of directors and officers: compensation

Answer 15

Directors and officers are entitled to fair compensation. The board of directors determines compensation.

Question 15

Rights of directors and officers: indemnification by the corporation

Answer 15

Director and officers must be indemnified (1) for expenses incurred on behalf of the corporation and (2) for expenses incurred if the director or officer prevails in a proceeding brought against them by the corporation.

Question 16

Director Fiduciary duties: duty of care

Answer 16

A director owes the corporation a duty of care to act in good faith and do what a reasonably prudent person would do with regard to her own business.

Question 17

Director Fiduciary duties: business judgment rule

Answer 17

A court will defer to the judgment of the board absent unusual circumstances such as a conflict of interest. The business judgment rule presumes director decisions are informed, serve a rational business purpose, are disinterested, and independent. Per the business judgment rule, a court will not second guess a business decision if it was (1) informed, (2) made in good faith), (3) made without conflicts of interest, and (4) had a rational basis.

Question 18

Director Fiduciary duties: reliance protection

Answer 18

A director may rely on the performance of, as well as information, reports, and opinion supplied by the following individuals if the director reasonably believes them to be reliable and competent (1) officers and other employees of the corporation, (2) outside attorneys, accountants, or other skilled or expert individuals retained by the corporation, and (3) a committed of the board or which the director is not a member. A director is acting in bad faith if they have knowledge of the matter at issue which makes their reliance unreasonable

Question 19

Director Fiduciary duties: exculpation by articles

Answer 19

A corporation’s AIC can include a provision shielding its directors from liability for money damages for the failure to exercise adequate care in the performance of their duties as directors.

Question 20

Director Fiduciary duties: duty of loyalty

Answer 20

A director owes a duty to act in good faith and with a reasonable belief that they are acting in the corporation’s best interest. A director violates the duty of loyalty when they or a family member engages in self-interested transactions. If the director does not disclose, the transaction will be set aside or the director will be liable for damages unless the director shows (a) the transaction was fair to the the corporation when entered into of the directors interest, (b) relevant facts were disclosed or known, and (c) the transaction was approved by a majority of disinterested shareholders or directors.

Question 21

Shareholder Fiduciary duties: duty to disclose

Answer 21

A majority shareholder is liable for breach of a duty to disclose when it withholds or fails to disclose information it knows or should know is material and the nondisclosure causes the minority shareholders to suffer a loss.

Question 22

Director Fiduciary duties: duty of good faith and fair dealing

Answer 22

A director is liable to the corporation for the directors decisions or failures to take action that were not in good faith, which also requires that directors not approve or condone wrongful or illegal activity and to establish corporate information and reporting systems that provide timely, accurate, information concerning both the corporation’s compliance with the law and its business performance.

A maj. SH owes a duty of good faith and fair dealing to minority shareholders.

Question 23

Shareholder rights: direct suit/derivative suit

Answer 23

Shareholders may sue on their own behalf to vindicate individual rights rather than corporate rights.

A shareholder may bring suit on behalf of a corporation in which they hold sock, usually for a breach of fiduciary duty, when the corporation has failed to. to bring a derivative suit, a shareholder must (1) make a demand to the board, (2) the board must accept or reject the demand, and (3) file suit. If a shareholder makes a demand, they must wait 90 days to file suit unless the demand would be futile.

A board can seek dismissal of a shareholders derivative action if a majority of the boards “qualified directors” determine in good faith, after conducting a reasonable inquiry upon which its conclusion are based, that continuance would be contrary to the corporation’s best interest.

Question 24

Shareholder rights: voting

Answer 24

Only shareholders of record are entitled to vote at a meeting of shareholders. Unless the articles provide otherwise, each outstanding share is entitled to one vote on each matter voted at a shareholder meeting.

Question 25

Shareholder rights: election and removal of directors

Answer 25

Shareholders may vote to elect or remove members of the board/directors. Shareholders Amy vote to fire directors with or without cause. Only a plurality of shared entitled to vote is required when a quorum is present.

Question 26

Shareholder rights: meeting

Answer 26

Shareholders convene and vote on corporate management issues in general meetings and special meetings. General meetings occur annually and require 10-60 days notice. Special meetings occur when reasonably notice is given as to the time, place, and matters to be discussed with 10-60 days notice. Notice is waived if the shareholder attends the special meeting despite not receiving proper notice.

Question 27

Shareholder rights: voting by proxy

Answer 27

A shareholder may vote either (a) in person, or (b) by proxy. A shareholder may vote by proxy with a signed proxy agreement which may be either revocable or irrevocable. A proxy is presumed irrevocable and is revoked by an action inconsistent with the grant of the proxy. An irrevocable proxy exists when the proxy is coupled with an interest and is labeled as such. A proxy is valid for 11 months, unless otherwise stated.

Question 28

Shareholder rights: quorum

Answer 28

For a shareholder vote to pass, a quorum of shares must be present at the meeting unless the articles of bylaws provide otherwise. When a quorum is present, a majority of votes case will approve the shareholder action.

Question 29

Shareholder rights: voting trusts

Answer 29

Shareholders create a voting trust when they (1) agree, (2) in writing, (3) to transfer their shares to a trustee who votes and distributes dividends in accord with the voting trust.

Question 30

Shareholder rights: voting agreement

Answer 30

A court will enforce a shareholder voting agreement regarding managing the corporation when the agreement is set forth in the articles, bylaws, or written agreement signed by all the shareholders when the agreement is made. However, a court ill not enforce components of a shareholder agreement that violate shareholder rights.

Question 31

Shareholder rights: right in inspect

Answer 31

A shareholder has a right to inspect corporate books and records for a proper purpose. the purpose and the request must be described with reasonable particularity, and the request records must be directly connected with the shareholder’s purpose. A proper purpose is a purpose reasonably related to a person’s interest as shareholder.

Question 32

Conflict between bylaws and articles

Answer 32

When a corporation’s articles of incorporation conflicts with its bylaws, the org’s articles preempt the bylaws.

Question 33

Amending bylaws

Answer 33

Unless provided otherwise, shareholders may amend the corporation’s bylaws. The bylaws may contain any provision that is not inconsistent with law or the articles of incorporation.

Question 34

Piercing the corporate veil:

Answer 34

Generally, shareholders are not personally liable for the debts of the corporation. A court may allow creditors to disregard the corporate entity and recover directly from shareholders. A court considers the following factors to determine whether to pierce the corporate veil: failure to observe corporate formalities, commingling business and personal assets, inadequate capitalization, whether the defendant actively participated in the business, and whether its a contract or tort case. A court is more likely to hold active shareholders liable than passive shareholders.

Question 35

Piercing the corporate veil: undercapitalization

Answer 35

An organization is undercapitalized when the corporation fails to maintain adequate funds to cover potential liabilities.

Question 36

Piercing the corporate veil: disregard of corporate formalities

Answer 36

A corporation disregards corporate formalities when it fails to respect the corporate form which adversely affects a third party’s ability to recover from the corporation.

Question 37

Piercing the corporate veil: domination and control

Answer 37

An individual exerts domination and control over the corporation when it acts as a vehicle for personal gain rather than corporate goal.

Question 38

Fundamental corporate changes:

Answer 38

Generally, approval of a fundamental corporate change requires (1) the board to adopt a resolution (2) written notice to shareholders, (3) shareholder approval by majority of votes to be cast, and (4) changes in the form of articles filed with the state.

Question 39

Fundamental corporate changes: dissenters rights

Answer 39

When a corporation undergoes a fundamental corporate change, it triggers dissenters’ rights. Dissenters’ rights are the rights of dissenting shareholders to force the corporation to purchase their shares at an appraised market value. To exercise their rights, a dissenting shareholder must notify the corporation of their intent to dissent prior to the shareholder vote on an issue and must not vote in favor of the change. Once the shareholder vote authorizing the conduct at issue has occurred, the corporation must deliver a dissenter’s notice to the dissenting shareholders identifying the mechanics of the purchase of their shares. The dissenting shareholders must then demand payment and despot their shares within the statutory time period.

Question 40

Stock distribution: issuance of shares

Answer 40

A corporation must have a sufficient number of authorized shares to cover all issued and outstanding shares, as well as shares subject to options that have been issued. Articles of incorporation must state the number of authorized shares of the corporation. If a corporation wants to issue more shares than authorized, the board and shareholders of the class of stock subject to increase must vote for an issuance of more shares.

Question 41

Stock distribution: shares as compensation

Answer 41

A corporation may issue options for the purchase of its shares on terms and conditions determined by the board of directors. Shares may be issued and options extended for different types of consideration, including services performed and contracts for services performed.

Question 42

Stock distribution: rights of shareholders of particular class of stock

Answer 42

All shares within a class of stock must have identical rights and preferences unless the shares within the class are divided unto a separate series. Shares that have a preferred right to dividends or distributions on liquidations should not be called “common” shares.

Question 43

Stock distribution: preemptive rights

Answer 43

Preemptive rights are the rights of existing shareholders in a corporation to purchase newly issued stock before it is offered to others; however, there are no preemptive rights for shares issued to satisfy option rights created to provide compensation to officers of the corporation.